7 Digitization of Services in Pakistan: Will the Emerging Trends Pave the Way for a Technology Revolution?1 7.1 Introduction The services sector can play a vital role in the development of an economy. Apart from its direct contribution to GDP, numerous services are inputs for other economic activities, and thus have potential indirect benefits; for instance, finance, telecommunications, and transport all tend to facilitate the commodity-producing sectors. Similarly, well-developed health and education services contribute to enhanced labor productivity and govern the overall social development of an economy. Globally, the services sector has been witnessing a shift towards digitization. Growing internet penetration is revolutionizing the way consumers and businesses gain and share information, execute transactions, and manage their day-to-day operations. Improved digital connectivity is reshaping consumer behavior, which is increasingly tilted in favor of convenience, cost savings, and customized retail experiences. Businesses are also capitalizing on opportunities emerging from digitization, such as supply chain efficiency, lower transaction costs, and enhanced flexibility in addressing consumer needs. A spillover impact of such services has also been observed on the productivity of the commodity-producing sectors, through processes such as automation and data handling. In Pakistan’s case as well, the services sector Figure 7.1: Share of Services by Type of Economy (2017) has gathered much prominence of late, as domestic commerce has thrived and High income 74 Upper middle telecommunications and finance sectors have 59 grown steadily.2 The overall share of the sector income in the country’s real GDP reached 60 percent at Middle income 58 end FY18, and around 56 percent in nominal GDP; the latter is higher than the South Asian Pakistan 56 average (Figure 7.1). While export orientation South Asia 55 of the sector remains lower compared to Lower middle commodity producing sectors, its contribution 53 to employment – and better employment income opportunities – is significant.3, 4 0 20 40 60 80 percent of GDP Data source: World Bank Moreover, Pakistan is also among the economies where digitization is triggering changes in some components of the services sector. The shift is most prominent in domains like e-commerce, fintech, and e-government, where new ventures and approaches to deliver services are picking up. Specifically, the market size of e-commerce has grown significantly in Pakistan over the last few years, transforming the way consumers interact with – and especially pay – businesses. At the same time, fintech players are tackling broad imperfections 1 This chapter draws heavily from our discussions with Pakistan Software Export Board; Pakistan Software Houses Association; Ignite (formerly National ICT R&D Fund); Planning Commission; National Incubation Centre, Islamabad; The Nest (I/O); Invest2Innovate; Daraz.pk; Karandaaz; and ePlanet. In addition, surveys conducted by Social Innovation Lab and Invest2Innovate were also useful in developing insights about the sector. Finally, we are also thankful to Payment Systems Department of SBP for providing regulatory insights about the sector. 2 Over the last five years, the services sector has contributed 70 percent on average to the country’s GDP growth. 3 Employment in services accounted for approximately 34 percent of total employment in Pakistan as of 2017, according to an estimate cited by the World Bank. 4 The average monthly income in the services sector is 129.1 percent higher than the overall national average. For males, the income is 54.6 percent higher, while for the women it is around nine times the national average. Data source: Household Integrated Economic Survey of Pakistan 2015-16. State Bank of Pakistan Annual Report 2017-18 in the credit market by devising innovative solutions, which are increasingly being embraced by the mainstream financial sector. Finally, at the government level, new possibilities to deliver services to citizens more efficiently are being explored by harnessing the power of technology, with e- government initiatives promising more convenience for the masses while simultaneously cutting the costs and leakages incurred by implementing authorities. This chapter expands on the aforementioned developments. To set the context, it begins by identifying the broad channels through which the digitization of services is impacting the macroeconomy. For background, it also touches upon the key enablers of digitization in Pakistan, such as the role played by New Generation (3G/4G) Mobile Services. Subsequently, the emerging trends in e-commerce, fintech and e-government in the country are analyzed at length. In terms of the big picture, the future model of global economic growth is discussed in light of the fourth industrial revolution, and what Pakistan will have to do to keep up with the curve. Finally, the chapter concludes by recapping some relevant policy measures, as well as the future outlook for digitization. 7.2 Impact on Pakistan’s Macroeconomy Figure 7.2: ExpectedGains in GDP Growth of Pakistan due The ongoing digitization in provision of to Digital Financial Servcies (2016-2025) 8.0 services may be growth-enhancing from a 7.0 macroeconomic perspective.5 This notion is supported by some gains that have already been 6.0 made, as well as estimates of future potential. 4.4 According to a McKinsey Global Institute 4.0 (MGI) report, Pakistan can experience an percent 2.4 increase in its GDP by a cumulative 7 2.0 percentage points (roughly US$ 36 billion) and create around 4 million new jobs during 2016- 0.2 2025 via an increase in the use of digital 0.0 6 Gains from Productivity Investment Overall financial services (DFS) alone (Figure 7.2). new labor gains gains growth Data source: McKinsey Global Institute (2016) Firstly, the impact of DFS through increased investment may occur via (a) increased credit to SMEs and households, and (b) a shift in savings from informal vehicles to formal digital accounts. Bearing in mind that bank lending to SMEs in the country is particularly low at present, the investment channel may represent the biggest untapped opportunity from which DFS gains can be realized in the next couple of years.7 At the moment, the penetration and access to financial services is showing some improvement, as digital technologies are being deployed for opening mobile accounts; carrying out funds transfers; introducing electronic payment systems; etc. In future, this may accelerate the shift in savings to digital accounts, and have further implications for policy goals like financial inclusion. Secondly, even beyond the domain of DFS, the IT and data handling firms are already generating productivity gains across numerous sectors, by streamlining business processes and making them more efficient. The use of technology in the fields of commerce, finance, transport and communications is facilitating cost effectiveness, by providing convenient alternatives to consumers and producers. Similarly, in the retail business, growing broadband penetration is providing businesses new and cheaper ways of reaching out to customers and competing for market share. 5 Like most other economies across the world, national accounts of Pakistan partly cover the value addition of computer- related activities (CRA) in the services sector. However, the activities of the ‘digital economy’ as a whole (the process by which digitization enhances the value addition of all sectors of the economy) is not adequately covered. 6 Source: McKinsey Global Institute, 2016, ‘Digital Finance for All: Powering Inclusive Growth in Emerging Economies’ [mckinsey.com] 7 The savings rate for Pakistan was 11.4 percent for FY18. Meanwhile, the SME share in private sector credit was 8 percent, as of end-2017. 88 Digitization of Services in Pakistan Thirdly, the impact on employment generation and entrepreneurship is quite evident. As the overall digital connectivity has improved, new services and industries have emerged and along with it, self- employment opportunities and entrepreneurial space for startups (Box 7.1).8 Commerce, transport and information sectors have benefited the most. The surge of mobile money has created a network of agents providing direct and indirect livelihood to thousands of people. Finally, in the domestic ICT sector, the presence of domestic freelancers and outsourcing firms is also growing. Box 7.1: The Evolving Domestic Startup Ecosystem Domestic startup activity in Pakistan is on the rise, attributed in part to a maturing support system. At present, around 52 ‘self-proclaimed’ incubation and acceleration programs exist in the country9, from which 7-15 startups are graduating every year (Table 7.1.1).10 Thus, a conservative estimate would put the number of startups that came out in 2017 alone at around 500. In addition to incubators and accelerators, the startup ecosystem has been strengthened further by co-working spaces; 11 fellowship programs; growing scale of angel investment;12 and the launch of local chapters of global initiatives like Startup Weekend, Startup Grind, Lean Startup Machine, and Startup Cup. Furthermore, Google Developer Group and Google Business Group meetings are now being held regularly in the country, and the launch of local chapters of the Organization of Pakistani Entrepreneurs (OPEN) and The Indus Entrepreneurs (TiE) has also added vibrancy to domestic startup activity. Table 7.1.1: Noteworthy Accelerators and Incubators in